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Low standards of democracy for shareholders in much of mainland Europe threaten the completion of the single market, says an influential UK investor group.

The Association of British Insurers, whose members hold more than a fifth of the UK stock market, also said strong shareholder rights would enable Europe to avoid prescriptive regulation on US lines.

ABI research shows investors have unsatisfactory voting rights in many European markets. A third of the top 300 European companies fail to uphold the principle of one share one vote, either by issuing shares with multiple voting rights or by imposing ceilings on voting or ownership.

Peter Montagnon, director of investor affairs at the ABI, said: “Our report shows that there is a long way to go before shareholder democracy meets widespread acceptance in European markets.”

One share, one vote, systems are used by less than a third of French companies, only a quarter of Swedish companies and 14% of large Dutch groups. Such distortion can have a considerable impact on how the market operates: in Sweden, one third of the share capital controls two thirds of the market.

Montagnon said it was wrong that any investor had a level of control disproportionate to the capital committed, but he added that wider issues were at stake. “The only way you will get a single market in Europe is if institutional investors spread their wings across borders. But portfolio investors are not likely to embrace enthusiastically markets where their rights are not respected,” he said.

Fostering robust shareholder democracy would allow the European Union to develop a flexible approach to governance, in contrast to the US, said Montagnon.

“Many people in Europe have watched with dismay as the US has gone down the route of expensive prescriptive regulation and sought to impose the same level of prescription on overseas companies. There is an opportunity here for Europe to show that it is more sensitive, more far-sighted, and better able to set the conditions for the avoidance of shocks,” he said.

But he said a principles-based, comply-or-explain approach to governance relied on strong shareholder rights so that investors could reject companies’ explanations. “It is probably no coincidence that the US, with weak shareholder rights, has had to choose a route of prescription. If Europe is to avoid this it needs to strengthen shareholder rights,” he said.

Adopting one share, one vote, would be a good place to start, said Montagnon, adding: “The principle is a good one around which the European Union should unite.”

The ABI faces an uphill battle, however. There is a strong attachment to voting restrictions in many European markets and the EU has no plans to tackle the issue.

In Sweden, multiple share voting structures are seen as having enabled national champions to grow without the threat of foreign takeover. The Wallenberg family, for instance, owns 10% of Ericsson’s capital but, until recently, enjoyed 80% of the voting power thanks to shares with 1,000-times the rights of ordinary shares.

In 2002, Ericsson’s foreign institutional investors supported a deeply discounted rights issue but demanded that the voting distortion be eased. After long negotiations, the Wallenbergs reduced their voting rights to 10-times those of ordinary shareholders.

In France, long-term shareholders are rewarded via additional voting rights and voting ceilings remain common. Companies including L’Oreal and Thomson recently abandoned voting rights restrictions, but Jean-Nicholas Caprasse, a partner at Deminor, the European governance consultants that carried out the research for the ABI, said these were the exception.

“There are many departures from the principle of one share, one vote, and the situation is changing only slowly. We’ve seen little sign of meaningful change in the last few years,” he said.

A combination of EU member states torpedoed the takeover directive, which called for bids to be approved on a one share, one vote, basis. It was amended to allow companies to opt out of the voting provisions. Montagnon said: “It is a weak directive as it doesn’t afford much protection to shareholders. Discussion of the detail was hampered by the fact that there was no clear agreement in Europe on a key point of principle – how much ownership should shareholders enjoy?”

Last year, the internal markets commission published a consultation on shareholders’ rights but the document did not address voting rights restrictions. The commission has pledged to study one share, one vote, as part of its medium-term action plan.

Montagnon said: “This is not a change we can impose overnight, least of all on markets that are used to other structures, but we have argued that the commission should approach this with more urgency.”